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The Bank of Japan’s policy of yield curve control depends on soft global rates and low yields, and this centre will simply not hold. As inflation rises, yields will spike, and the result will be a plunge in the yen. Ultimately, the central bank will resort to QE-style measures, but not before USDJPY hits 150.

Macro Monday: Waiting for the dust to settle

After last week's events, it's a little unclear what the markets are doing

Is it really a USD breakout or a development of a trend?

At best we should get one US rate hike this year

By Kay Van-Petersen

Welcome to Macro Monday, your cross-asset weekly call on global markets. For a replay of the call please click here.

For week 41 we take a look at the following:

Given the high impact week 40 – USD breaking out higher, leading to a lot of significant breaks and closes on technical levels: USDJPY, gold, silver, US 10-year, etc – it feels like we need the dust to settle to determine whether these markets are coming or going – i.e. Is this really a USD breakout and development of a trend? Or are we just in another iteration of the range-bound, two steps forwards, three steps back shuffle that we’ve been doing for most of 2016? I am not so sure. I do feeling strongly about two things:

One: I think at best we get one Federal Reserve hike this year – at best. I still think the Fed implied probability of 65% for December to be way too high.

However, I think the more interesting thing is, that this could be the last hike we see from the US for a while. i.e. After postulating four hikes this year and potentially only delivering one, it seems to be that the market is mispricing the Fed’s ability to move next year.

This may mean that the Fed’s next move, be it in 2017/18/19, may be to ease rather than hike.

The key risk to this view, is if inflation forces the Fed’s hand in the US. And this is the fine line it travels, on the one hand it knows it is far in the cycle (i.e. we are a lot closer to a recession than a boom economy) and on the other rates are not high enough where lowering them in the face of a recession helps the economy. And how do you lower rates if inflation is picking up while your economy is slowing down?

Two: I fail to see equities escaping velocity from higher government bond yields – they (EQ) cannot have the best of both worlds, i.e. rallying when yields compress to new lows and rallying when yields start to jump.

Clouded outlook. After last week's events it's a little unclear to see what's happening in the markets. Photo: iStock

Thoughts on near-term tactical positioning

It feels that on the tactical side, we need to wait for the dust to settle – given not only the monster USD bull week, price shocks on sterling, but also the ongoing presidential elections and higher march up in yields.

Tactically few things seem clear to me. Structurally, some capital should be put into gold and silver miners. Yes we are way oversold and the sentiment is poor – but we still have not seen a massive reduction in gold positioning (we’ve been long overdue for a healthy clean out and that’s what we are in the midst off now).

Higher moves up in G3 yields, leaves me wanting to have downside exposure in equities (i.e. remember the September 9 selloff, VIX up 40%, S&P down 2.5% ... came on the back of the G3 yields spiking post the September 8 European Central Bank meeting).

Often you have to sit on the side-lines until the noise clears up; this is one of the hardest things to do for traders/investors.

COT report highlights

FX: Continued increase USD bulls, up 7% in bets from up 12.4bn to up 13.3bn

Sterling new record shorts, +11% increase to +98k lots – positioning post Friday (October 7) will be very interesting

Big decrease in CHF shorts by 50% to down 3,000 lots. CAD shorts also increased by 21% to -14,000

The trend of additions to NZD shorts and Aussie longs continued

MXN and JPY unchanged, while euro saw slight increase in shorts by up 8% still well short of one-year lows

Edward Liu runs through all the technicals this week, with fewer charts yet a lot more detail for a different take.

S&P500: uptrend is consolidating within a symmetrical triangle. If it breaks down, we are targeting 2032. Long-term chart reveals a bull market seven years in the making, compared to the previous bull run which lasted five years. An October close below September’s closing would be technical confirmation of the rally correction.

Dax: Consolidating within a symmetrical triangle, possible trade view would be to short at current levels. TP: 10,200 , SL 10,600

DXY: Major down trend for DXY (Dollar Index) since Dec 2015, stochastics overbought and about to cross over, and closing below downward sloping trendline resistance on Friday

AUDUSD: Having trouble breaking major trendline resistance on the weekly, maintain bearish bias unless weekly close above trendline resistance. However, Inverse H&S is in the making on the weekly charts. Two consecutive weekly closes above trendline resistance would turn bias to bullish.

USDCAD: Rising wedge, CCI overbought which has been a good leading indicator of previous declines.

USDJPY: Pierced Ichimoko clouds but currently trading back within the clouds. Stochastics bearish cross over in overbought territory, suggesting downside this week.

GBPUSD: Currently sitting on support at 1.2410, based on Fibo extension lines applied to 1.5 handle.

Gold: Broke down from symmetrical triangle, could go as low as 1226 based on price targets, hwoever, RSI and stochastic suggest correction to the upside

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